Inherited IRA issues
Wife passed in 2020. Husband is the sole designated beneficiary of the wife IRA. Husband passed in early 2021. At the time the husband passed, husband has 2 IRAs. One from his wife and one from his work. For both IRAs, there are 5 designated beneficiaries. Taxpayer is the husband’s brother and is one of the 5 designated beneficiaries. Both wife and husband are born in 1961. Taxpayer was born in 1967.
Here is my analysis:
I would confirm first all relevant parties are designated beneficiaries to ensure that the 5-year rule would not apply.
Assuming all relevant parties are designated beneficiaries, I would check to see successor beneficiary rule does not apply to the IRA that originates from the wife. Because wife passed prior to her RMD and the husband did not survive to the date when his first beneficiary RMD would be due, my understanding is that husband would be treated as owner of the IRA he inherits from the wife.
As such, taxpayer would be considered designated beneficiaries for both IRAs he inherited (including the one he gets indirectly from his brother’s wife).
Furthermore, the taxpayer would be considered eligible designated beneficiaries since he is less than 10 years apart from his brother. As such, the taxpayer is exempt from the 10-year rule.
Under this scenario, since the taxpayer’s brother passed before RBD, taxpayer would base his RMD for years after the year of his brother’s death using his single life expectancy unless he elects to apply the 10-year rule.
I appreciate any comments or corrections on the above.
Thank you.
Permalink Submitted by Alan - IRA critic on Fri, 2021-11-12 03:35
Good analysis and I agree with it. The provision treating the husband as the owner has been in the IRS Regs for years (1.401(a)(9)-5, QA 5). Under the Secure Act, husband’s beneficiary is an EDB due to being not more than 10 years younger than husband. While Secure Act Regs have not yet been issued, the still extant separate account rules require the brother to establish a separate inherited IRA no later than 12/31/2022 in order to be able to use his own single LE unless he was the oldest of the 5 individual beneficiaries.
Permalink Submitted by Henry Chan on Fri, 2021-11-12 07:25
Although the taxpayer can elect to apply the 10-year rule (which means the taxpayer is not required to take annual distribuion and the only requirement is that the entire balance is fully distributed by 12/31/2031), the taxpayer would likely want to start using single LE to take annual distribution starting for year 2022 given that the taxpayer is currently 54 and the RMD calculated is rather small. Let me know if you agree or if I am missing anything.Are there situation a taxpayer would want to make the election to apply the 10-year rule?
Permalink Submitted by Alan - IRA critic on Fri, 2021-11-12 15:34
Yes, the taxpayer could elect the 10 year rule as the latest Pub 590 B indicates this is an available option only if death was prior to RBD, as it was in this case. Possible cases where a non spouse beneficiary might do this include being much older than the decedent or being subject to a high tax rate in the next few years but lower by year 10 or to be no longer alive by year 10, or valuing the flexibility of the 10 year rule vs. that of LE.
Permalink Submitted by Henry Chan on Sat, 2021-11-27 20:29
We are actually still in the process of verifying whether the taxpayer is a designated beneficiary (as oposed to the situation where the taxpayer’s brother did not name any beneficiaries on his IRA and after his death the money belonged to the estate and eventually either by will or by state law the taxpayer ends up getting a portion of the money). It appears in either case, during 2021 the taxpayer does not need to take RMD. Please let me know if this is correct. Thank you for all your help.
Permalink Submitted by Alan - IRA critic on Sat, 2021-11-27 22:13
Agree there is no year of death RMD for 2021 to be taken by the beneficiary since brother treated as the IRA owner passed prior to RMD.